The Delaware District Court recently affirmed an appeal of an order denying millions of dollars in compensation to bankruptcy professionals due to certain provisions in a final debtor-in-possession (DIP) financing order. In re Barnes Bay Development Ltd. (“Barnes Bay”) was filed under Chapter 11 on March 17, 2011, case no 11-10792. On September 23, 2011, the bankruptcy court denied confirmation of the Chapter 11 plan. On December 1, 2011, the court entered two orders, the first approving final fee applications, and the second denying a motion for entry of an order determining the scope of a certain carve-out. The case was dismissed on December 2, 2011. On December 15, 2011, multiple parties appealed the December 1 orders.
Counsel for the debtors and the Official Committee of Unsecured Creditors sought bankruptcy court approval for final allowance and payment of $2.85 million, in addition to the $6 million they had received during the case. However, the bankruptcy court entered an order providing that the lawyers were not entitled to $2.85 million, but only to a pro rata share of $27,802 in satisfaction of remaining professional fees pursuant to the DIP order.
The DIP order provided a carve-out for fees of the lesser of (i) the budgeted amount, and (ii) the accrued and unpaid amounts allowed pursuant to an interim compensation order. On appeal, the district court looked at a 13-week cash flow forecast included in the DIP order, which provided for approximately $6.3 million for legal fees. The professionals argued the budgeted amount was closer to $11 million based on a document not part of the DIP order. The court concluded the forecast attached to the DIP order was the budget, and used the $6.3 million figure as the “budgeted amount” under the DIP order.
The law firms argued they were entitled to all fees earned up to $6.3 million in addition to $6 million in compensation already received, and asserted that was the intention behind the provisions. The law firms based their argument on language that provided they were entitled to “accrued and unpaid” fees “allowed pursuant to the [compensation order],” where “accrued” meant “earned but not yet paid.” The district court identified several redundancies in the law firms’ reading, and read “accrued and unpaid” to mean “allowed fees and expenses,” as was set forth in the financing agreement attached to the DIP order. This ruling concurred with the bankruptcy court in that it entitled the law firms to fees and expenses allowed pursuant to the comp order, and incurred prior to the termination date.
The budgeted amount of $6.3 million was less than the total allowed fees. The district court held that once the budgeted amount was reached, the carve-out was exhausted. Since interim payments had reduced the available amount under that cap to $27,802, the professionals could split that sum pro rata.
The Barnes Bay decision dealt exclusively with law firms, but there is no reason that a court could not extend the holding to all professionals. The message is clear; even if the parties all intend and advocate for a certain interpretation of language in a deal, courts can and will interpret the language in the way that makes the most sense considering all relevant documents. Attorneys need to be vigilant in ensuring that definitions and terms are in agreement, and make sense contextually. Financial professionals should be active in reviewing documents and pointing out to the drafters any areas that seem unclear.